Working Capital Financing^367
more quickly than long-term loans. The firm or borrower is assured to funds for a
number of years, which is not the case with borrowing on a credit line. Finally, smaller
firms with limited access to capital markets find term loans very convenient.
Disadvantages. The borrower may feel that, at times, term loan provisions are too
restrictive. The limitations on issuing new debt may hinder the firmís ability to finance
future growth. Another disadvantage of term loans is that at times the cost may be
high. If the loans involve issuance of options on warrants that are exercised, then the
affective cost of the loan to the borrower increases. Despite these disadvantages, term
loans are a major source of financing.
Debentures for working capital
Debentures have been traditionally used for long term funding the capital projects, but
they can also be used for funding short term requirements of working capital and become
the part of long sources used for funding working capital requirements. Funding is used
by corporates for a medium time frame and hence are a stable source of funds.
Commercial Paper
CP refers to the short-term promissory notes issued by ìblue-chipî corporations - large,
old, safe, well known companies like TISCO, ONGC, SAIL, etc. The maturities normally
vary from 90 to 180 days as compared to US where the maturity period ranges from 5
days to 270 days, and the denominations are for a minimum of Rs 10 lac or more -
usually more. These notes are backed only by the high credit ratings (normally P1+ the
highest grade available) of the issuing corporations which means that there is no security
given by the company when issuing CP.
CPs are normally issued at a discount to its face value and are redeemed at the face
value.
Credit Terms
The maturity of this credit source is generally six months or less, although some issues
carry 270-days maturities. The interest rate on commercial paper is generally slightly
lower (one-half to one per cent) than the prime rate on commercial bank loans. Also,
interest is usually discounted, although commercial paper is available at times that is
interest bearing.
New issues of commercial paper are either directly placed (sold by the issuing firm
directly to the investing public) or dealer placed. Dealer placement involves the use of
a commercial paper dealer, who sells the issue for the issuing firm. Many of the major
finance companies place their commercial paper directly. The volume of direct versus